Three Misunderstandings of China-ASEAN Economic Relations

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In this opinion piece, Malcolm Cook, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore, explores — and explodes — three myths about the ASEAN countries’ relationships with China, the U.S. and one another.

In 2005, China’s President Jiang Zemin introduced his theory on the historical rise and future of the Chinese Communist Party, calling it the Three Represents. At the last Association of Southeast Asian Nations (ASEAN) Summit in Kuala Lumpur, under the three-part slogan “our people, our community, our vision,” the leaders of the 10 member-states welcomed the formation of the ASEAN Community based on three pillars: the ASEAN economic community, the ASEAN political-security community and the ASEAN socio-cultural community.

In line with this China-ASEAN embrace of troikas, I would like to debunk three pervasive misunderstandings about current China-ASEAN economic relations. The first is China’s economic influence in Southeast Asia. The second is the conflation of ASEAN (a light-touch inter-governmental body) with Southeast Asia (a region of ten diverse multi-ethnic states). The third is the nature of U.S.-China competition in relation to regional trade agreements. Each one of these three “misunderstoods” in isolation clouds our ability to understand the present and future directions of China-ASEAN economic relations. Often, though, they have come across as conventional wisdom, when in fact they are neither wise nor conventional.

Chinese Primacy

Based on aggregate visible trade statistics, China is often presented as the most important economic partner for all Southeast Asian countries. In contrast, the United States and Japan are often presented as rapidly declining influences, while the European Union, South Korea and Taiwan rarely get mentioned. China is the largest trade partner for the Southeast Asian economies as a group and for each country, except Brunei Darussalam. China’s primacy when it comes to imports is even greater. According to ASEAN aggregate trade statistics, in 2014, China accounted for more than one of every five dollars of imports coming into Southeast Asia. The EU-28 accounted for one of every eight and Japan one of every 10.

But there are two problems with this cursory use of aggregate visible trade statistics as a yardstick for comparative economic influence and as a corollary for the diplomatic deference due. The first is a depth problem. For the six largest economies in Southeast Asia – Indonesia, Thailand, Malaysia, Singapore, the Philippines and Vietnam respectively (also known as SEA-6) – a significant share of both exports to and imports from China are the result of the location of links of regional and global production chains in China and those six economies.

Yet, the majority of the production chains are not controlled by Chinese firms but by Japanese, South Korean, EU and U.S. firms that own and profit from the intellectual property that oils these chains. Samsung is the single largest foreign direct investor in Vietnam. Hence the translation of aggregate visible trade statistics between China and Southeast Asia or China and each of the SEA-6 economies into a measure of economic dependence on China or potential Chinese economic leverage over these economies and states is false.

“The majority of the production chains are not controlled by Chinese firms but by Japanese, South Korean, EU and U.S. firms.”

The second, more pernicious problem is one of breadth. Aggregate visible trade statistics are only one measure and likely not the best measure of economic integration, importance or interdependence between economies. On the other hand, foreign direct investment has been the driver of the Southeast Asian economies’ trade with the world. If one looks at the UNCTAD data on FDI flows to Southeast Asia, they tell a very different story from the aggregate visible trade figures. Outside of Cambodia, Laos and Myanmar, China is a non-major source of FDI in both stock and mostly flow terms for the economies of Southeast Asia.

At the end of 2012, Japan’s stock of FDI in the region was more than five times larger than China’s, while that of the EU was close to nine times larger. Taiwan’s stock was half that of its gigantic cross-strait neighbor. The United States’ stock in the tiny island of Singapore was more than three times the size of China’s total regional investment. While China was the largest source of FDI for Cambodia, Laos and Myanmar respectively, it was not in the top five for any of the SEA-6. There is a strong inverse correlation between the level of economic development and openness of the economies of Southeast Asia and their reliance on Chinese FDI. Vietnam’s recent economic success is a clear example of this, despite being a neighbor and kindred political system of China.

Other key economic statistics confound conventional wisdom on China’s primacy. For instance, remittances are a more direct personal form of cross-border economic exchange and arguably the one that makes the greatest direct contribution to poverty alleviation. The Philippine economy receives the largest inflow of remittances of any economy in the region and its central bank keeps a close and credible eye on this economic lifeline. According to Bangko Sentral figures, in 2014, remittances from the U.S. accounted for 42.6% of the $24.3 billion that came into the country. Singapore was the most important East Asian source, providing 4.8%, with Japan next at 4%.

China, however, accounted for a statistically insignificant 0.1% of Philippine remittances, less than twice the flows from Southeast Asia’s least populous state, Brunei Darussalam. Bank lending and portfolio investment flows are other statistics that don’t conform to the aggregate visible trade-based view of current and rapidly increasing Chinese economic primacy.

ASEAN = Southeast Asia

The study of Southeast Asian states and societies is hamstrung by the growing tendency to focus on Southeast Asia as a region and not its individual states, and then further injured by the conflation of ASEAN with Southeast Asia. This conflation is so widespread in the academic community and in diplomatic and business language on the region that it risks becoming an operative illusion. Talking about the EU as an economic region is much more plausible, given the much higher levels of economic integration, interdependence and freedom of movement among EU member economies, the comparative similarity in levels of economic development and industrial structure, the legal reach and enforcement of EU law, and the fact that the EU is a customs union.

Southeast Asia is much more diverse economically than Europe. Singapore’s per capital GDP in current U.S. dollar terms is close to 60 times higher than Myanmar’s, the poorest Southeast Asian economy. While Malaysia in per capita terms is the third richest Southeast Asian economy, it is only a fifth as wealthy as Singapore, but three times wealthier than Indonesia, the fifth wealthiest and the largest economy in Southeast Asia. On economic freedom, the evidence of diversity and difference again overwhelms that of similarity and unity.

According to the latest economic freedom ranking by the Heritage Foundation, Singapore was the second freest economy in the world after Hong Kong. Myanmar was the least free of the 10 Southeast Asian economies, coming in at 158 out of 178. Indonesia came in at 99th place. With some exceptions (Brunei worse and the Philippines better), regional rankings on economic freedom matched those of per capita wealth. The freer the economy, the wealthier its people.

“The freer the economy, the wealthier its people.”

The assumption inherent in referring to ASEAN as a region or an economy is that membership in the regional group is the defining characteristic of Southeast Asian economies’ integration with each other and with the wider world. Again, this is hard to uphold. While member-states are bound by the ASEAN Free Trade Agreement, its dispute mechanism has never been activated. This is the case despite clear breaches, for the reason that it would be against the so-called “ASEAN Way.”

Southeast Asian states have used ASEAN as a platform to negotiate preferential trade agreements with six other economies, with more in the pipeline. Yet, the utilization rates of these agreements is quite low and the wealthier, more advanced economies in the region have negotiated deeper and broader trade agreements with key trading partners outside the ASEAN platform. The fact that Singapore, Brunei, Malaysia and Vietnam are Trans-Pacific Partnership (TPP) signatories is testament to this, as is the expressed interest of Thailand, Indonesia and the Philippines in joining the TPP second round. This would leave only Cambodia, Laos, and Myanmar primarily reliant on ASEAN for their most important trade agreements.

Finally, Singapore’s entrepot function notwithstanding, trade and investment links between Southeast Asian economies are comparatively weak and, with some exceptions, not strengthening rapidly. Singapore’s dominance of intra-Southeast Asian trade and investment flows and its consequent skewing of regional numbers have no equivalent in the EU. Southeast Asia has 10 quite diverse economies that are not that well integrated with each other and while ASEAN is important, it is far from a defining source of this integration or of these economies’ global integration.

U.S.-China Cold War

It is now par for the course to present the ongoing efforts to negotiate regional preferential trade agreements in the Asia-Pacific as a manifestation of a Manichean struggle for regional primacy between the U.S. and China. President Barack Obama’s reference to the TPP as a mechanism to enable the U.S. (and not China) to write the rules of the regional economic order has strengthened this conventional wisdom. Yet Chinese officials and media, after first lambasting the TPP as a U.S. plot to contain China economically, are now publicly pondering the possibility of China joining the TPP in the second round or after. If the TPP was primarily a U.S. weapon in its strategic rivalry with China, then China joining it would be a capitulation. If not, then the idea that the TPP was primarily such a weapon will be proven false.

This proclivity to see trade deals as weapons in the U.S.-China rivalry is even harder to uphold when it comes to China. Many experts and commentators, for example, see the Regional Comprehensive Economic Partnership (RCEP) process involving China and not the U.S. as China’s answer to TPP. Yet, RCEP is not China-led at all, it is ASEAN-led after the member-states of ASEAN knocked back an earlier Chinese East Asia Free Trade Area initiative. Indonesia, in fact, is the RCEP chair. Moreover, the U.S. is not part of the negotiations, not because China is blocking the U.S., but because entry into RCEP requires non-ASEAN states to have a pre-existing preferential trade deal with ASEAN. The United States does not have and is not planning to start negotiating a U.S.-ASEAN trade deal. Likewise for the EU, Russia and Taiwan.

In 2014, as Asia-Pacific Economic Cooperation (APEC) host, Chinese President Xi Jinping took a page from U.S. President George H.W. Bush’s book and endorsed the decade-old idea of using APEC, a trade forum that includes the U.S. and China, to move towards a Free Trade Area of the Asia-Pacific (FTAAP) that would encompass all 21 APEC economies and beyond. Leaders at APEC have recognised both the U.S.-led TPP and the ASEAN-led RCEP process as “pathways” to this larger agreement. If the nine APEC economies currently not included in the TPP join, then the overlap between the TPP and APEC will be complete.

“Even if China wanted to be hegemonic, which Beijing strongly refutes, outside of Cambodia, Laos and Myanmar, it doesn’t have the clout to succeed.”

President Xi’s use of the FTAAP as the main focal point of China’s APEC year was widely seen as a move to counter the TPP; U.S. thrusts, China parries. Yet, FTAAP, as agreed to by the leaders at APEC, is a long-term ambition. In a sense, TPP is the most advanced pathway to the FTAAP. The U.S. is the largest and most advanced economy under consideration for and considering FTAAP participation, and the existing TPP members account for two-thirds of the cumulative APEC GDP. It is very hard to see how FTAAP can be a counter to the TPP, except if one wants to fit facts, however awkwardly, into a pre-existing assumption of a U.S.-China rivalry as the primary driver for the current move to mega-regional trade agreements among Asia-Pacific states. Overcoming deadlocked global trade talks and the inefficiencies of dated bilateral trade deals across the Asia Pacific are more powerful and positive drivers of the TPP and RCEP processes, and maybe also FTAAP aspirations.

Direction of China-ASEAN Relations

Understanding these three pervasive “misunderstoods” helps clarify the present state and likely direction of China-ASEAN relations. First, Southeast Asian fears of Chinese economic primacy in East Asia are simply that: fears. Even if China wanted to be hegemonic, which Beijing strongly refutes, outside of Cambodia, Laos and Myanmar, it doesn’t have the clout to succeed. Second, the future of regional trade and trade agreements is not hostage to U.S.-China competition, and ASEAN centrality is not undermined but strengthened by current efforts to negotiate mega-regional free trade deals. Finally, particularly for those with a mind for business, a caution: Southeast Asia is not a coherent and integrated economic region and ASEAN is not a powerful agent for either greater coherence or integration. Rather, Southeast Asia is a diverse region of 10 quite distinct economies. Diversity, as has always been the case in Southeast Asia, trumps unity.

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